An Economic Concern

[politicomind]

Much of the current concerns of our economy is the balancing of the budget.

Let me submit the backstory of the budget before we discuss.

In 1930 John Maynard Keynes produced a revolutionary perspective of the American government and the economy. Before Keynes's theory it was the practice of the US government to almost always balance the budget except in cases of war, at which time the government had to over spend to survive. Yet in peace time the government would insist on keeping a balanced budget. Yet, the depression occurred and no one exept Keynes had an answer to get out of the depression.

Keynes assessed that the government facing a decreased amount of tax revenue also then spent less, but of course this is what Keynes claimed was wrong. Rather than spend less, John Maynard claimed that the government should spend more, it should give money to the poor, pay for housing, help house the homeless, provide more healthcare, and even as a gimmick build up the military, all of which would create more jobs in the form of more food production, more housing repairs or building, or simply more bomb building and gun making. This stimulation to the economy would create an upward spiral of more money to industry, creates more jobs, which creates more tax revenue with creates more money to give to the poor, who will then stimulate industry, which creates jobs, which creates even more tax revenue. Okay. It's called the Keynesian model, and its about 96% effective. The only way its not effective is if the poor get the money and save if and don't spend it. But usually the poor are so poor they have to spend it to survive. This is precisely why food stamps are food stamps so that the person can't save the money.

Now let's bring this to today's economy. Today our government is allowed to overspend. Yet, its allowed to overspend in good times or bad times as it sees fit. Some economists say that overspenind in good times contributes to inflation as well as keeps the GDP growing. And other economists claim that if we stop overspending the GDP will slow down and lead to an eventual depression which we will have to spend our way out of anyway.

 

[brewmenn]

Sounds great in theory, but the problem is that eventually the bills come due. When times are good you need to pay back, so that you can over spend when times are bad.

 

[agaglio]

Some economists say that overspenind in good times contributes to inflation as well as keeps the GDP growing. And other economists claim that if we stop overspending the GDP will slow down and lead to an eventual depression which we will have to spend our way out of anyway.

Get rid of the federal reserve system and we will find sweet equilibrium. If we destroyed the federal reserve system, there wouldn't be any depressions.

As Allen Greenspan said,

if, under laissez faire, the banking system and the principles controlling the availability of funds act as a fuse that prevents a blowout in the economy-then the government, through the Federal Reserve System, put a penny in the fuse-box.

 

[Iriemon]

Sounds great in theory, but the problem is that eventually the bills come due. When times are good you need to pay back, so that you can over spend when times are bad.

I think that is a little closer to what Keyenes argued. When times are good there should be a surplus, run deficits when times are bad.

 

[Iriemon]

. Some economists say that overspenind in good times contributes to inflation as well as keeps the GDP growing. And other economists claim that if we stop overspending the GDP will slow down and lead to an eventual depression which we will have to spend our way out of anyway.

Spending or overspending does not cause inflation. Overall inflation is caused by overexpansion of the money supply.

I have not heard many economist argue that if we stop overspending the GDP will decrease.

 

[Iriemon]

Get rid of the federal reserve system and we will find sweet equilibrium. If we destroyed the federal reserve system, there wouldn't be any depressions.

Because there weren't any depressions before the Fed? Au contraire.

 

[agaglio]

Depressions before the federal reserve system were caused by the creation and destruction of the Bank of the U.S. Once again, the government's fault. I'm not arguing that small recessions are impossible in a free market, I'm saying that in every major depression, the government is at fault.

P.S. what ta hell is your avatar?

 

[128shot]

Ludwig Von Mises predicted the depression around 1928 before Keynes even came along with his theory after the fact.


Murry N. Rothbard wrote a book on it, actually.


The book is here online (believe it or not, for free) at

http://www.mises.org/rothbard/agd.pdf

 

[rathi]

Depressions before the federal reserve system were caused by the creation and destruction of the Bank of the U.S. Once again, the government's fault. I'm not arguing that small recessions are impossible in a free market, I'm saying that in every major depression, the government is at fault.

The Great Depression was not primarily caused by governmental issues. Several factors were involved, but the primary cause was the buying on margin and speculation in the stock market.

 

[agaglio]

The Great Depression was not primarily caused by governmental issues.

the primary cause was the buying on margin and speculation in the stock market.

Your statements are contradictory. The government caused the over speculation when the Federal Reserve System charged low interest rates. So ya, it was the governments fault.

 

[Iriemon]

Depressions before the federal reserve system were caused by the creation and destruction of the Bank of the U.S. Once again, the government's fault. I'm not arguing that small recessions are impossible in a free market, I'm saying that in every major depression, the government is at fault.

I guess a scapegoat is convenient. But what is your basis for asserting this?

P.S. what ta hell is your avatar?

Over indulgent kitty. One could compare it to over-indulgence and consequence that is the real cause of business cycles.

 

[agaglio]

I guess a scapegoat is convenient. But what is your basis for asserting this?

Panic of 1819: Failure of the banking system (Bank of U.S.)

Panic of 1837: Implementation of Specie Circular by Andrew Jackson, and his destruction of the Bank of the U.S.

Panic of 1873: Grant shortened the money supply causing various upsets.

Panic of 1893: Passing of the Sherman Silver Purchase Act. The government bought silver with notes that could be redeemed for silver. When people tried to redeem them, there wasn't enough silver causing many bank failures.

Panic of 1907: lasted a year, was averted by private banks and businesses.

Great Depression: Increased speculation due to low interest rates (controlled by federal reserve board) lead to the stock market crash.


A bit too convenient. Wouldn't you agree? :2wave:

 

[Feela]

You realise Hayek's business cycle theory was crushed by Keynes and kaldor?

 

[Iriemon]

Panic of 1819: Failure of the banking system (Bank of U.S.)

Panic of 1837: Implementation of Specie Circular by Andrew Jackson, and his destruction of the Bank of the U.S.

Panic of 1873: Grant shortened the money supply causing various upsets.

Panic of 1893: Passing of the Sherman Silver Purchase Act. The government bought silver with notes that could be redeemed for silver. When people tried to redeem them, there wasn't enough silver causing many bank failures.

Panic of 1907: lasted a year, was averted by private banks and businesses.

Great Depression: Increased speculation due to low interest rates (controlled by federal reserve board) lead to the stock market crash.


A bit too convenient. Wouldn't you agree? :2wave:

Could be, is this from some published source?

 

[agaglio]

nope. Looked up each one myself. You can look them up if you so please.

 

[Iriemon]

nope. Looked up each one myself. You can look them up if you so please.

Then upon what basis do you assert, for example, that the panic of 1819 was a failure of the banking system (Bank of U.S.), other than your say-so?

 

[agaglio]

Then upon what basis do you assert, for example, that the panic of 1819 was a failure of the banking system (Bank of U.S.), other than your say-so?

Destruction in Europe (The Napoleonic Wars) created a great market for America's goods, leading to a post War of 1812 boom. The Bank of the U.S. allowed for very very cheap land speculation by lending money to almost anyone. Of course, this lead to over speculation in land. In 1818, when the bank realized what was happening, they called in many of their loans leading to the failure of the economy and the start of the panic of 1819.

 

[SFLRN]

You realise Hayek's business cycle theory was crushed by Keynes and kaldor?

And Keynes was crushed by Friedman's proof of the consumption function; people base their purchasing decisions off of what they perceive their long term spending money to be. Keynes also made other mistakes that were mentioned earlier in other forums. Also, Keynes system required someone lose money, the taxpayers, to stimulate the government giving out money elsewhere. Along with that too much government borrowing has a negative impact on the economy and can crowd out private borrowers. Among other things.

 

[Iriemon]

Great Depression: Increased speculation due to low interest rates (controlled by federal reserve board) lead to the stock market crash.

What is the basis for this assertion? What were the interest rates pre-crash, and how did they lead to increased speculation in the stock market, and how did that lead to the crash?

This table http://www.census.gov/statab/hist/HS-39.pdf reports that the prime rate in 1929 was 5.5-6%. Which by no means was a historical low; the prime rate was lower for much of the 50s and 60s and also in 2002, in neither time period did we see the overspeculation and resulting correction (crash) anywhere near the magnitude of the great depression.

There must be other causes of the '29 market crash that simply low interest rates.

 

[agaglio]

What is the basis for this assertion? What were the interest rates pre-crash, and how did they lead to increased speculation in the stock market, and how did that lead to the crash?

First of all, over speculation leads to a crash when people realize that the money they are buying with isn't actually there. Banks call in loans and people and businesses go bankrupt. Does this answer your question about how over speculation and the calling in of loans leads to a crash?

Second of all, the table you provided does not actually tell the story. Sure, interest rates have been lower. But, in just 1929 1,124,800,410 shares were traded, which is still a record high (The World Almanac). If so much speculation was going on, banks would not have enough money to fill all requests, and would scrutinize whom they were giving their loans to. Also, the interest rate they charge would increase. Increasing interest rates discourage taking out a loan. Although there have been lower interest rates, in proportion to the amount of stocks being traded, it is extremely low. This is the fault of the Federal Reserve. This simply could not happen in a free market.

Have I proven that the government is at fault in every major depression yet? Must I give you a course in economics too? :mrgreen:

 

[Iriemon]

First of all, over speculation leads to a crash when people realize that the money they are buying with isn't actually there. Banks call in loans and people and businesses go bankrupt. Does this answer your question about how over speculation and the calling in of loans leads to a crash?

I don't quite understand your answer. I'd agree that if people in the aggregate believe that the assets they are buying are overvalued, the result is a cumulative effort to sell that can cause a crash.

You have introduced in this answer the prospect of banks calling loans as a part of the stock market crash, which is different than the interest rate explanation. Can you elaborate?

Second of all, the table you provided does not actually tell the story. Sure, interest rates have been lower. But, in just 1929 1,124,800,410 shares were traded, which is still a record high (The World Almanac). If so much speculation was going on, banks would not have enough money to fill all requests, and would scrutinize whom they were giving their loans to. Also, the interest rate they charge would increase. Increasing interest rates discourage taking out a loan. Although there have been lower interest rates, in proportion to the amount of stocks being traded, it is extremely low. This is the fault of the Federal Reserve. This simply could not happen in a free market.

I don't follow. A lot of shares were traded, so what? Are you trying to assert that the volume of what was traded was because of the interest rate? If so, why haven't there been similar volumes when interest rates were lower in other periods? What is the significance of the interest rate to the volume traded, if any? What does that relationship have to do with the market crash?

What is the fault of the Fed? That interest rates were somewhat low at 5-6%? So what? Or that lots of shares were traded? How is that the fault of the Fed?

Have I proven that the government is at fault in every major depression yet?

You have asserted it. Quite a different thing than providing it.

Must I give you a course in economics too? :mrgreen:

You have no obligation to defend your assertions if you do not wish to -- or if you cannot. People frequently make assertions and then are unable to defend them here.

 

[agaglio]

I don't feel like typing this all out, but if it will make you realize what I'm telling you is true, I will.

I don't quite understand your answer. I'd agree that if people in the aggregate believe that the assets they are buying are overvalued, the result is a cumulative effort to sell that can cause a crash.

You have introduced in this answer the prospect of banks calling loans as a part of the stock market crash, which is different than the interest rate explanation. Can you elaborate?

People borrowed money, which was offered at a reasonable rate, and they purchased stocks with it. So the market grew and grew until there was an extreme amount of speculation. All this speculation was largely successful, growth was at an extreme high. But why would you stop investing? The interest rates are the same, despite the extremely large amount of people taking out loans. You could simply take out more loans on credit and make a lot of money. The Federal Reserve no longer allowed rates to rise in response to increasing demand for loans. :doh

This is why Alan Greenspan refers to banks as a fuse-box to prevent a blowout.

As the amount of money invested in stocks grew, which was all borrowed money (buying on credit was extremely popular), people were making large sums of money. Profits were calculated on exaggerated growth. People had made tons of money, but only on paper. When people tried to redeem their money, they realized that goods were not there to back up the extreme sums of money they had acquired.

Do you understand this?

There were many failures and a crash. When banks tried to call in their loans, it only made matters worse.

Are you trying to assert that the volume of what was traded was because of the interest rate?

I am asserting that the interest rates did not increase as over speculation increased because the Federal Reserve controlled interest rates. This only caused more speculation.

If so, why haven't there been similar volumes when interest rates were lower in other periods? What is the significance of the interest rate to the volume traded, if any?

Because as the amount traded increases, the interest rates are increased (the Feds increase them) until speculation slows, and there is equilibrium. The significance of interest rate to volume traded is as follows: As volume traded (made possible by borrowing money) increases, so should interest rates.

Or that lots of shares were traded? How is that the fault of the Fed?

It's their fault because by not increasing the rate, people borrowed more money to buy more shares.

You have asserted it. Quite a different thing than providing it.

Have I provided it? I'm not sure how to explain this any simpler. Maybe I could address your specific problems.

 

[Iriemon]

I don't feel like typing this all out, but if it will make you realize what I'm telling you is true, I will.

You don't have to defend your assertions. Whether what you say is true, we shall see.

People borrowed money, which was offered at a reasonable rate, and they purchased stocks with it. So the market grew and grew until there was an extreme amount of speculation. All this speculation was largely successful, growth was at an extreme high. But why would you stop investing? The interest rates are the same, despite the extremely large amount of people taking out loans. You could simply take out more loans on credit and make a lot of money. The Federal Reserve no longer allowed rates to rise in response to increasing demand for loans. :doh

If, as I understand it, you are asserting that low interest rates caused people to borrow more money which caused more speculation in the stock market, then why did we not see this same phenonema happening in the 50s, 60s, and 00s, when interest rates were lower?

There must be some other explanation to the speculation that occurred prior to the '29 crash than low interest rates. Because they weren't that low.

As the amount of money invested in stocks grew, which was all borrowed money (buying on credit was extremely popular), people were making large sums of money. Profits were calculated on exaggerated growth. People had made tons of money, but only on paper. When people tried to redeem their money, they realized that goods were not there to back up the extreme sums of money they had acquired.

Do you understand this?

Yes, except for your primary contention that this was happening because of low interest rates as you asserted. Because they have been lower since, and this phenonema hasn't repeated itself, at least not nearly on the scale of the great depression.

I do agree with you that overspeculation of stock bought on credit had a lot to do with the '29 crash.

But it had nothing to do with the interest rates (that the Fed controlled or at least influenced), and everything to do with margin requirements (which it did not).

I am asserting that the interest rates did not increase as over speculation increased because the Federal Reserve controlled interest rates. This only caused more speculation.

OK. I understand what you are asserting. What you have not explained is how or why a 5.5% interest rate caused this over-speculation in the stock markets leading to the '29 market crash, when lower interest rates in the 50s 60s and 00s have not caused the same thing to happen.

Because as the amount traded increases, the interest rates are increased (the Feds increase them) until speculation slows, and there is equilibrium. The significance of interest rate to volume traded is as follows: As volume traded (made possible by borrowing money) increases, so should interest rates.

Are you asserting that the Fed should base money supply and interest rate policy on whether it thinks stocks are overvalued in the markets?

It's their fault because by not increasing the rate, people borrowed more money to buy more shares.

Why didn't this happen in the 50s, 60s and 00s?

Have I provided it? I'm not sure how to explain this any simpler. Maybe I could address your specific problems.

You explained the other depressions with simple conclusions. I asked you for the source of your assertions; you declined to provide anything. I don't a problem understanding you simple conclusory assertions. I just don't accept your simple statements alone as proof. I'm not asserting you are necessarily wrong (though as to the Great Depression I do find your interest rate theory lacking in logic and substance). But I'm not agreeing you have proved anything as to the others.

 

[agaglio]

You don't have to defend your assertions. Whether what you say is true, we shall see.



If, as I understand it, you are asserting that low interest rates caused people to borrow more money which caused more speculation in the stock market, then why did we not see this same phenonema happening in the 50s, 60s, and 00s, when interest rates were lower?

There must be some other explanation to the speculation that occurred prior to the '29 crash than low interest rates. Because they weren't that low.

What I am asserting is one of the most accepted explanations of the Great Depression. For some reason, you don't understand the connection between interest rates and speculation. I guess I'll explain it again.

As you can see from the chart you posted, rates go in cycles, they may be low at one point, but as speculation starts to rise, the Feds raise them to slow the speculation.

Can you understand this? If not, I don't know what to tell you, except that you don't understand the basic principle of interest rates.

What the Fed did NOT do was raise them when speculation rose. Not raising rates allows speculation to increase! Raising rates makes speculation decrease! THE FEDERAL RESERVE BOARD DID NOT RAISE RATES!

The fact that they did not raise the rates in response to the economy, caused over speculation!

In 1929,the 6% interest rate is tiny for the amount of speculation occurring.

There must be some other explanation to the speculation that occurred prior to the '29 crash than low interest rates. Because they weren't that low.

Please understand, the rate was too low if you look at the amount of speculation.

It did not happen again in the 50s, 60s, or 2k2, because the low rates were put there to bolster speculation (and therefore the economy) when the economy was in need of a boost. If, in was the 50s, 60s, or 2002 and speculation was extremely high, the feds would have to adjust the rates or another depression could occur. The difference that you are searching for between the 50s/60s/2k2 and the great depression is the amount of speculation which was far greater in the 20s.

Are you asserting that the Fed should base money supply and interest rate policy on whether it thinks stocks are overvalued in the markets?

My initial assertion was that we should abolish the Federal Reserve and let the free market control interest rates just like it did before the Federal Reserve. I am asserting that money be based on a standard, and with the Fed gone, and no government intervention, there would be no depressions.

You explained the other depressions with simple conclusions. I asked you for the source of your assertions; you declined to provide anything.

What do you think I have been doing this entire thread?

I don't a problem understanding you simple conclusory assertions. I just don't accept your simple statements alone as proof.

That is logical and fair. Which is why I am explaining everything.

I'm not asserting you are necessarily wrong (though as to the Great Depression I do find your interest rate theory lacking in logic and substance).

It is entirely logical; if you would take the time to try to understand. I can't figure out if you're trying to trick me, make me look bad by not being able to provide evidence for my assertions, you just don't want to understand, or that you really can't figure out what I'm talking about.

 

[Iriemon]

What I am asserting is one of the most accepted explanations of the Great Depression. For some reason, you don't understand the connection between interest rates and speculation. I guess I'll explain it again.

As you can see from the chart you posted, rates go in cycles, they may be low at one point, but as speculation starts to rise, the Feds raise them to slow the speculation.

Can you understand this? If not, I don't know what to tell you, except that you don't understand the basic principle of interest rates.

What the Fed did NOT do was raise them when speculation rose. Not raising rates allows speculation to increase! Raising rates makes speculation decrease! THE FEDERAL RESERVE BOARD DID NOT RAISE RATES!

So even though the interest rates were not that low, you think the Fed should have determined that there was overspeculation in the stock market and raised interest rates for that reason. In other words, your contention is that the Federal Reserve's policy on money supply and interest rates should be based upon whether it thinks there is overspeculation in the stock markets.

I disagree that is a proper function of the Fed. I don't believe the Fed has ever viewed that as its function, nor should it. The Fed's job is to control the money supply based upon whether there is a concern for inflation. The Fed's job is not to speculate whether stocks (or any other asset) are valued appropriately.

I could just imagine the response that would happen if the Fed announced today that it was going to crank up interest rates because it thought the stock market went up to much last year.

The fact that they did not raise the rates in response to the economy, caused over speculation!

There is no logical basis for that assetion. Interest rates do not cause over speculation.

In 1929,the 6% interest rate is tiny for the amount of speculation occurring.

Easy to say in hindsight, I suppose. To what rate do you suggest raising the rate would have made a difference, without at the same time throwing the economy into the dumpster?

Please understand, the rate was too low if you look at the amount of speculation.

You are asserting a cause and effect where none has been demonstrated.

It did not happen again in the 50s, 60s, or 2k2, because the low rates were put there to bolster speculation (and therefore the economy) when the economy was in need of a boost. If, in was the 50s, 60s, or 2002 and speculation was extremely high, the feds would have to adjust the rates or another depression could occur. The difference that you are searching for between the 50s/60s/2k2 and the great depression is the amount of speculation which was far greater in the 20s.

I don't understand the contention that the Fed regulates interest rates to bolster or dissuade speculation in a particular asset market. I have never heard of that.

My initial assertion was that we should abolish the Federal Reserve and let the free market control interest rates just like it did before the Federal Reserve. I am asserting that money be based on a standard, and with the Fed gone, and no government intervention, there would be no depressions.

Then there would be no way at all to control the money supply or interest rates, which would not prevent the phenonma of speculation in any case.

What do you think I have been doing this entire thread?

Discussing one depression.

It is entirely logical; if you would take the time to try to understand. I can't figure out if you're trying to trick me, make me look bad by not being able to provide evidence for my assertions, you just don't want to understand, or that you really can't figure out what I'm talking about.

I'm not trying to trick. I disagree with the contention that interest rates caused (or causes) overspeculation in the stock market.

It is easy after a market correction and with the benefit of hindsight to determine that there was overspeculation. But that kind of prescience is not so clear at the time. In the mid-90s there were articles that stocks were overvalued. Had the Fed raised interest rates, it would have hurt the economy, and the stock market would have lost several years of 20-30% annual growth. Likewise, in 1999, there were plenty of articles asserting that even though P/E ratios were high, it was justified because of the "new economy" created by new technology, and there was no reason to believe that there would be a major correction. And based on that expectation, lots of folks continued investing, based on the performance as a whole. In hindsight, it is easy to pick a precise point where a downturn started.

On what basis should the Fed have divined to raise the interest rates, when there was no indication that there was a problem with inflation? Had the Fed cranked up interest rates in 1995, it would have (rightly) been crucified for unnecessarily killing economic growth.

It is the Fed's job to control inflation, and keep interest rates as low as possible to encourage economic growth as long as there is no danger of undue inflation. It is not the Fed's job to set policy based on whether there is over-speculation in particular asset market. In this decade, the stock market performance has been below average. So therefore according to your theory, interest rates should be decreased. Yet at the same time, there arguably has been overspeculation in the real estate market. So should the Fed lower rates to encourage speculation in the stock market? Or raise rates to discourage speculation in the real estate market?

What encouraged overspeculation in the stock market in 1929 was not interest rates, which were not historically low. Overspeculation is caused by greed, by folks believing that they can make money. What exacerbated overspeculation before the Great depresssion was the fact that you could buy stocks on a 10% margin. Give your broker $100, he loans you $900, and you get $1000 in stock. If the market goes up 10%, you have doubled your money. Lots of folks made millions in this manner by leveraging their investments 90%. The flip side is the danger when the market declines. If the stock price goes down 10%, your equity is wiped out, and you get the call from the broker to ante up the 10% reserve requirement. If investors are highly leveraged (as they were), they attempt to obtain the money to meet the margin requirement by selling other stocks, which cumulatively, created a huge downward pressure on stock prices. Hordes of people (or brokers) were all trying to sell their stocks to meet margin requirements, which depressed prices further, which further increased the margin calls. The whole thing spiraled down collapsed like the card house pyramid that it was.

The correction from this phenonma was not to increase interest rates (which would have a dubious effect on margin trading anyway) but to require greater margins. After the great depression, the margin requirement was changed to 50%. And we have not seen a market collapse like the '29 depression since.

We unfortunately have the same danger in the real estate market today. Speculators have bought lots of real estate on razor thin margins and on mortage ARMS and balloons, putting 10% down to leverage their profits when the market went up and they flipped the real estate. But with real estate values declining, and mortgage payments increasing because of ARMs or balloons, lots of these folks are under pressure to sell, which is creating further downward pressure on real estate prices. We are seeing this happen already. Fortunately, the real estate market is not nearly as suscepitable to overspeculation as the stock market was, because most folks by homes to live in, not solely for speculation, and calls on loans are not immediate when there is a decrease in real estate prices. So we are unlikely to see a 90% fall in real estate prices, though how much of a correction there will be remains to be seen.

If you want to argue that overly restrictive money policy after the stock market collapse prolonged the great depression, I think there would be firmer ground for that contention, because I agree that Fed money policy does have an effect on the economy as a whole.